A Sugar High For Your Portfolio

A consortium of global food producers including Kraft Foods (NYSE:KFT), General Mills (NYSE:GIS) and Hershey's (NYSE:HSY) warned, in a letter addressed to Agriculture Secretary Thomas Vilsack, that the United States could "virtually run out of sugar". The letter estimates that by the end of 2009, the United States could only have 13 weeks of supply left.

Last week, sugar futures hit a staggering 28-year high of 23.33 cents per pound. While sugar is still well off its record 66 cents, set in 1974, analysts predict the commodity still has some room to run long term. (For background reading, see Sugar: A Sweet Deal For Investors.)

The Perfect StormTwo of the largest sugar-producing countries are experiencing a perfect storm, literally, of abnormal weather patterns. In Brazil, fields are submerged due to heavy July rains. This reduction in harvested sugar is compounded by the diversion of sugar crops into ethanol, which has led to dwindling Brazilian supplies. In India, the lack of a monsoon season has fields parched. This past June was the driest season in 83 years, and meteorologists predict that the rains may be returning, although they will only be about 87% of the average. As a result, India may need to become the largest net importer as opposed to world's largest exporter. The country has contracted to import 2.9 million tons of raw sugar.

In China, the world's third-largest producer, harvests are likely to lag behind domestic demand by nearly 1.5 million tons. A smaller Russian crop is also expected because of hail and drought. This should lead to imports of 2 million tons this year. Even Mexico is dealing with falling harvests. After an 11% drop in yield, Mexico may import up to 393,000 tons through the end of the year. Add these short-term weather conditions and supply contractions to the world's ever increasing "sweet-tooth", and sugar seems like a long term buy.

Ways to PlayThe best and easiest way to get exposure to sugar is through the iPath Dow Jones AIG Sugar Sub-Index ETN (NYSE:SGG). As the only pure play of sugar, it is up more than 60% so far in 2009 and will continue to do well as the world's demand for sweets continues. The ETN is set to mature in 2038 and charges 0.75%.

Investors wanting to incorporate sugar into an overall commodity portfolio have a few choices using broad-based funds. With nearly 37% weighting to sugar, the PowerShares DB Agriculture (NYSE:DBA) is also great way to gain exposure to sugar, along with corn, soybeans and wheat. Barclays' (NYSE:BCS) offers a 43% weighting to sugar; it also has a sugar-laden ETN, the iPath DJ AIG Softs Sub-Index ETN (NYSE:JJS).

Bottom LineSugar remains an interesting growth story. Weather conditions and drops in harvest rates have the commodity rising in the short term, while pent up demand and the world's increasing appetite for sweet things make for a real long-term story. For investors wanting to add sugar to their portfolios, the previous exchange traded funds are a great way to play the commodity. (For more, see Commodity Prices And Currency Movements.)